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Tennessee Franchise Rehaul
In January of this year, Governor Lee called for a rehaul of the franchise tax calculation and to install refunds as restitution for taxpayers who paid taxes that were being disputed by some as unconstitutional. The result was Senate Bill 2103 (By Johnson) / House Bill 1893 (By Lamberth) adopted on April 25th. The Lee administration called for legislation to “repeal a portion of the franchise tax.”1
The Important Bits
Schedule G of the TN Form FAE 170 will not be applicable for tax periods ending on and after January 1st, 2024, with franchise tax being calculated only on Schedule F, the apportioned net worth of the company in TN. Refunds can be applied for with respect to tax periods ending on or after March 31, 2020, for returns filed on or after January 1, 20212. Refunds can only be applied for between May 15th and November 30th, 2024.
Legislative History
January 22nd – House Bill 1893 is introduced to the TN House of Representatives
January 29th – Senate Bill 2103 is introduced to the TN Senate
February – April – Both bills are debated in both houses of TN legislature.
April 25th – Joint Conference Committee Report is Adopted (69 Ayes to 23 Nays)
May 10th – HB 1893/SB 2103 is signed by Governor Lee
May 13th – Tennessee Public Chapter 950 3 is published
Changes to FAE Calculations
The new legislation eliminates the minimum franchise tax base which was based upon the value of real and tangible property owned and rented in TN. Beginning with tax periods ending on or after January 1, 2024, the franchise tax will be based solely upon apportioned net worth.
Refund Opportunity
Refunds can be claimed for tax periods ending on or after March 31st, 2020, for returns filed on or after January 1, 2021. The amount eligible for a refund is the excess, if any, of the tax computed on the alternative minimum property measure and the net worth measure for applicable tax years. What if tax credits were used to pay franchise tax? Do these amounts get to be refunded as cash to the taxpayer? Tax credits used to pay franchise taxes will be reinstated but will not be given back as a cash refund.
Refund claims can be filed from May 15th through November 30th,2024 ONLY! This is a very short window to file, and it is imperative that you file for a refund in that timeframe. Returns can be filed online at https://tntap.tn.gov/eservices// or via mail through a physical form available at the same website. Prior to submitting the refund claim, taxpayers will need to file amended return for each tax period they wish to claim a refund for. Due to the short window, it is highly encouraged that taxpayers file online to avoid the possibility of delay.
Refund claims must be accompanied by a completed Report of Debts form if a refund of $200 or more is requested. This can be completed on the TNTAP website. A balance sheet, schedule of assets/liabilities, pro forma, or federal return pages supporting the net worth calculation by entity may be provided to support the amount of net worth reported on Schedule F but these are not required.
As part of the refund claim process, taxpayers must waive their right to sue the state and related entities with respect any claims that the franchise tax was unconstitutional due to the internal consistency test. Also, taxpayers agree that their name and general refund range will be published on the TN DOR website from May 31, 2025 through June 30, 2025.
Why File for a Refund?
It's not automatic
If you believe you are due a refund, you must file for one before the deadline. Unlike normal tax returns where the state will refund the amount you overpaid once you file your return, the franchise tax refund must be applied for separately.
Interest
Interest will be added to the refund due beginning 90 days from the date the commissioner receives the refund claim and sufficient documentation that the refund due is correct and is payable.
How much should I expect in a refund?
If Schedule A, line 2 is larger than line 1, you will be eligible for a refund.
Franchise tax is $0.25 of every $100.
For a quick refund calculation, subtract line 1 from line 2:
- If negative: No refund available
- If positive: Multiply by 0.0025 to see estimated tax refund
For Example:
8,000,000 Real and Tangible Personal Property
- 2,000,000 - Total Net Worth
6,000,000 Difference
6,000,000 X 0.0025 = $15,000 Refund
How is this going to affect me?
Net Worth Calculations
As the new TN franchise tax is solely calculated on apportioned net worth, taxpayers should analyze if a consolidated net worth election would be beneficial. If you have never heard of a consolidated net worth calculation. I would recommend asking your accountant about the process of consolidation.
Summary
Changes to tax codes always leave a wake of confusion for taxpayers. One point of confusion is going to be the timetable in which you must act to receive your due refund. There is a very short period in which you can apply for refunds and delaying application can lead to money being left on the table. If you believe that your company is due a refund and need help in the process, feel free to reach out to our all-star tax professionals who will be happy to assist you every step of the way.